ARCHIVED CD 2009-028
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December 1, 2009
SUBJECT: Status Indian Employee Working on a Reserve - Anywhere in Canada Except the Yukon
1.1. The purpose of this directive is to advise departments of new reporting requirements for income earned by a Status Indian employee working on a reserve anywhere in Canada, except the Yukon.
1.2. A notice of information to employees concerning the above subject has been included with this Compensation Directive.
1.3. For Status Indian employees working on a reserve in Quebec, this directive should be read in conjunction with Compensation Directive 1996-053, dated November 25, 1996.
2.1. In the past, a Status Indian employee working on a reserve did not have his exempt earnings appear on his T4, as required by the Canada Revenue Agency (CRA). Instead, client organizations were asked to prepare letters for their Status Indian employees identifying the amount of income earned, union dues deducted and pension contributions deducted while working on a reserve. Each Status Indian employee had to submit this letter to CRA with his tax return.
3.1. A Status Indian employee working anywhere in Canada, except the Yukon, is completely exempt from federal income tax if one of the following situations apply:
- The employee performs at least 90% of the employment duties on a reserve;
- The employee performs more than 50% of the employment duties on the reserve, AND the employee or employer resides on a reserve;
- Both the employee and the employer reside on a reserve.
Note: For a Status Indian employee who does not perform at least 90% of his employment duties on a reserve and doesn't meet conditions 2 and 3 above, only the portion of income he earned while performing his job duties on a reserve will be exempt from income tax.
Employees are required to fill out form TD1-IN which provides the necessary authorization to waive both the federal and provincial income tax. The form can be found at the following Internet address:
In addition to the above form, every employee has to ensure that he has already completed a federal TD1 form and a provincial TD1 form for his province of employment. By completing these forms, the employee would continue to receive other tax credits (e.g. spouse or common-law partner amount, amount for an eligible dependent) he could be entitled to if, at some point in time, he does not work on a reserve. The forms are available at the following Internet addresses:
Federal and Provincial TD1 forms
4.1. T4 Statement
Starting with the 2009 T4 statements, the tax exempt income earned by a Status Indian employee while working on a reserve will be reported in box 71 "Status Indian employee" of the "Other information" area.
Where a Status Indian employee was entirely exempt for the full taxation year, boxes 14 (Employment Income), 20 ( Registered Pension Plan (RPP) Contributions) and 44 (Union Dues) will be blank. The full exempt earnings will be reported in box 71 "Status Indian employee" of the "Other information" area on the T4 statement.
Where a Status Indian employee was only partially exempt during the taxation year, the taxable portion of the earnings will be reported in box 14 (Employment Income), and the tax exempt portion in box 71 (Status Indian employee) of the "Other information" area. However, box 20 (RPP Contributions) and box 44 (Union Dues) will show the full contributions for the taxation year.
4.2. Total Exemption
If the employee's income is entirely tax exempt for the full taxation year, compensation advisors should report the employee's income tax exemption in the appropriate status elements of the employee's Master Employee Record (MER). The corresponding field is MER element 42 (Income Tax Status). Compensation advisors should enter a code "0" by processing a Status Change (STC - Pay Action Code (PAC) 12A) to waive tax at source for a Status Indian employee. Where the employee meets the criteria for a tax exemption on his entire income, the code "0" should remain in the "INC TAX STTS" field 42.
4.2.1. Client organizations will need to process their Status Changes (STC - PAC12A) to show code "0" before year end to ensure that the full earnings are reported in box 71 of the T4 for all Status Indian employees who have had the full exemption in 2009.
4.3. Partial Exemption
If the Status Indian employee's income is NOT entirely tax exempt, compensation advisors must calculate and report the portion of his earnings while working on a reserve, including taxable benefits, directly to the pay office before the end of the year. The pay office, upon receiving the written notification, will process a PAC 30 transaction to credit MER element 744 (Indian Exempt Income).
Compensation advisors could also utilize one of the following two alternatives to provide some tax relief at source for a Status Indian employee who is not fully tax exempt:
- Ensure that the employee's manager advises the compensation advisor of the date the employee will begin working on the reserve prior to the employee actually commencing work on the reserve. The compensation advisor must then ensure that a code "0" is entered in the "INC TAX STTS" field in a timely manner. The employee's manager would also be required to advise the compensation advisor of the date that the employee will cease working on the reserve prior to the employee's departure from the reserve. The compensation advisor must then ensure that the code "0" is replaced by the appropriate code;
- With the employee's manager, the compensation advisor estimates the gross earnings that will be exempt from income tax as a result of the employee's working on the reserve. Input the estimated amount into MER element 43 (Federal Tax Exemption "Undue Hardship") and MER element 44 (Additional Provincial Tax Exemption) by processing a Status Change (STC - PAC 12A). This exercise should be carried out at the beginning of each calendar year.
It should be noted that, in either of these two methods above, the income which is actually exempt from tax may not be accurate. Where there has been an overstated amount of the actual tax exempt income, the employee may be required to pay income tax upon filing his income tax return. Similarly, where there has been an understated amount of the actual tax exempt income, the employee may receive a tax refund upon filing his income tax return. This information should be conveyed to the employee.
4.3.1. To ensure the timely receipt of this information, client organizations will be responsible to request this in advance from the Status Indian employees' managers, on a yearly basis.
4.3.2. For all Status Indian employees who were only partially exempt during the year, client organizations will need to report, in writing, the portion of the Status Indian employee's earnings while working on a reserve, including taxable benefits, directly to the pay office before the end of the year. The pay office, upon receiving the written notification, will process a PAC 30 transaction to credit MER Element 744 (Indian Exempt Income) which will ensure that only the tax exempt earnings are reported in box 71 of the T4.
4.4 Canada Pension Plan (CPP)
Every Status Indian employee working on a reserve for the Federal Government of Canada is covered under the CPP. Therefore, client organizations must ensure that the appropriate code is entered in field 38 and that CPP contributions are being deducted.
4.5. The Personnel-Pay Input Manual (PPIM) will be updated to incorporate the changes contained in this compensation directive.
5. PAY OFFICES RESPONSIBILITIES
5.1. Pay offices, upon receipt of information from client organizations, will be responsible to process PAC 30 transactions, before year end, to credit MER element M744 (Indian Exempt Income).
6.1. Any inquiries on the information contained in this document should be addressed to your Public Works and Government Services Canada (PWGSC) Compensation Services Office.
Original Signed by
Accounting, Banking and Compensation
Reference(s): CJA 9007-012
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